What the L-P Memos Really Mean

By Judi Bari - Anderson Valley Advertiser, June 10, 1992 - Reprinted in Timber Wars, © 1994 Common Courage Press.

During last week's courtroom drama over the Albion logging protests, I attempted to testify about the L-P Memos. These memos, sent by L-P top-level executive Bob Morris to L-P president Harry Merlo, show the seedy underside of this depraved corporation's local practices. I say that I attempted to testify because L-P lawyer Cindee Mayfield objected to every word out of my mouth, and Judge Luther upheld most of her objections. No way did they want this information out on the streets. But that's why we have the AVA. So, Judge Luther, this is what I would have said if you had let me testify.

The L-P Memos were leaked to the press last January. They are a series of memos written over a three-year period from 1988 to 1991 in which L-P Western Division Resource Manager Bob Morris becomes increasingly critical of Harry Merlo's business practices, until Harry finally fires him. At the time the memos became public, there was much oohing and aching over the fact that L-P insiders were shown admitting privately what they were denying publicly: that L-P has vastly overcut the forest in the redwood region. But that's about as deep as the analysis of these memos ever went, and that's only half the story. The L-P memos are not environmental documents. They are economic documents, and they show that Harry was in it up to his ears.

The very first memo, titled "Long-Term Timber Purchase Agreement," describes a plan for Harry Merlo to pull off a private takeover of L-P similar to the MAXXAM takeover of Pacific Lumber. The plan was devised by Morris at Merlo's request. It called for Merlo to buy out part of L-P's Western Division, so that ownership would go to Harry Merlo as an individual, instead of the L-P stockholders as a public group. Apparently Harry was not satisfied with being president, CEO and chairman of the board of L-P. He wanted it all.

The takeover plan called for Harry to buy off the sawmills while leaving the timberlands to the stockholders. This would be easy to pull off, speculates Morris, because the stockholders will think they're getting the good end of the deal by keeping the timberlands, and will therefore sell the sawmills off for cheap. of course, as in all sleazy business deals, they would have to move quickly once they got their ducks in a row. otherwise an outsider (known as a "white knight" in corporate takeover parlance) could come in and snatch up Harry's deal by offering the stockholders more money. As Morris puts it: "The timing of a management-led buyout must be of short duration. It will focus attention on the company and this, coupled with our liquidity and low debt position, may attract outside participants."

"Objection!" piped up Cindee Mayfield when I got this far in my court testimony. "The witness cannot prove that this takeover plan was ever implemented." Naturally Judge Luther upheld the objection and I never got a chance to finish. But this is the whole point of the L-P Memos. Morris' disillusionment with L-P came as he watched Merlo set the stage for such a takeover, even though the final step of the buyout was never taken.

After this first memo was written, Merlo upped the logging rates to liquidate the timber lands, thereby stripping the value of the part of the company that the stockholders would end up with. Because the actual inventory and cut rates were considered proprietary information, the stockholders would not have to know that the woods had been looted and the trees were gone. At the same time, Merlo invested large amounts of money in the new mill equipment, then closed down the mills, thereby increasing (and hiding) the value of the part of the company that he himself would own.

It took Morris a while to figure out what was going on. But by March of 1990, he definitely smelled a rat. Why, he wondered, was L-P losing money in the mills while cutting their own timber while other smaller companies were making money milling timber that they bought on the open market? Morris called these strange money losses "red flag warnings" that something was wrong.

Specifically, Morris cites the Oroville mill, where they had sawed 67 million board feet (mbf) of their own timber at a loss of $2 million. If they had sold just 5 mbf of that timber on the open market instead of milling it themselves, they would have made a profit without overcutting. So why was L-P cutting so fast, and why was it that the more they milled the more money they lost?

Morris also cites other examples of puzzling financial losses in the mills, including the Calpella chip mill, which he calls "an economic disaster." The costs of operating the Calpella yard, where baby trees were stored and chipped, were as great as the costs of logging and trucking those trees to the yard. At the time, Morris wrote it off to inefficiency. But over the next year, as Merlo closed down mill after mill because of these supposed financial losses.

Morris finally got it. This was not a case of avoidable business losses. This was a case of deliberate liquidation of the mill infrastructure. In August 1991, Bob Morris wrote his final memo. In it, he decries the "decimation" of the Western Division, which violates not only good forestry but also sound business principles. "The hopes, dreams and inspirational motivation of hundreds of dedicated employees have been shattered," he writes. He notes the "inordinate proportion of milling capacity closed by L-P versus the (lack of such closures) by other less financially sound or resource rich companies." These include "Red Bluff, Potter Valley, Cloverdale, Inyokern, Lakeview, Carlotta, one shift at Oroville, one shift at Ukiah, one shift at Willits, and soon to close, Covelo and Big Lagoon."

"The management of L-P owes its stockholders, longtime employees, their families and the dependent communities a better legacy than is now unfolding," Morris says.

Why did L-P invest $6 million in state-of-the-art mill equipment in Cloverdale, then close the mill three years later, asks Morris. Why did they invest another $6 million in the power boilers at Samoa for just one year's operation? Why did L-P upgrade the pulp mill, which is a by-products plant that runs on chips from their sawmills, while they were simultaneously closing so many sawmills that they no longer produce enough chips to feed the pulp mill, and are now "dangerously dependent on outside supplies' for raw materials?

The real reason, of course, is that by mismanaging the mills then shutting them down stocked with new equipment, L-P can take a tax write-off and Harry Merlo can disguise the true value of the mill infrastructure. If the takeover plan described in Morris' first memo ever went through, this would certainly put Harry in a position to enrich himself. But why would Harry want all this out-of-use mill equipment? The answer, with or without the Merlo takeover, is that it is needed for L-P's foreign ventures.

The best known of L-P's foreign operations is their Mexico mill, where they are currently shipping rough-sawn redwood to be planed by workers who make 85 cents an hour. The machinery in the Mexico mill was taken from the Potter Valley mill when it closed in 1989. I have seen a video of the Mexico mill in operation, and it is a huge, empty building with just one planer in it. That building is going to be filled with something, and it doesn't take an Einstein to figure out where the rest of the machinery is likely to come from.

But even more ominous than their Mexico mill is L-P's new Siberia operation. L-P has recently signed a contract to log the Siberian forest, where 57% of the old growth left in the world is located. But the Russians have stated that they are not interested in money. They want mill equipment in exchange for their logs, so that they can eventually become self sufficient. And guess who has the mill equipment they need?

So, with this missing link, Harry Merlo's master plan becomes clear. Because it never really did make sense for L-P to open this whole huge Mexico mill just for the few little shreds of redwood that are left up here. More likely, the Mexico mill will end up milling the logs from Siberia, which will be purchased with the remnants of the mill equipment from the north coast. Bob Morris mentions neither Mexico nor Siberia in his leaked memos, but it is undoubtable that he is aware of these connections. For now that Morris is no longer L-P's Western Division resource manager, he has gotten himself a new job working as a broker, middling the Siberia deal for L-P.

Such is the cynical world of the corporate executive. But what does this have to do with Albion? Well, Judge Luther, if you remember, this whole thing started when L-P got you to overrule the California Department of Forestry's stop order on the Enchanted Meadow cut. L-P told you that they would be forced to close their Ukiah mill if they didn't get this 300 acres down, and you believed them.

What we're saying is that L-P lied to you. The Ukiah mill (and the Potter Valley, Covelo, Cloverdale, and all the other mills) are not closing because we are trying to save a few trees before L-P completes its cut-and-run. The mills are closing and the forest is being blitzed because of a deliberate and conscious business decision that Harry Merlo made in 1988. He decided to sacrifice the redwood region by liquidating both the woods and the mills in order to capitalize his foreign ventures in Mexico and Siberia.

L-P claims that our little protests are causing them irreparable economic harm. of course this is ridiculous. We are incapable of causing this multinational corporation any significant economic harm, even if they were to give us the entire Albion watershed, which, by the way, is not a bad idea.

The real reason L-P wants to stop us so much is that we are exposing Harry Merlo for the coldhearted Corporate Criminal that he really is. And that, Judge Luther, as you pointed out in court, is our First Amendment right. Which brings me to my final point. The only question left unanswered in the L-P Memos is why Harry Merlo never completed his private takeover plan for L-P. And I'm not really sure why, but I do have a theory. Morris states in that first memo that the takeover plan is dependent on their ability "to convince financial people that the bulk of the value is in the timber." I think we thwarted that plan when we held Redwood Summer and managed to tell the world that the redwood ecosystem is almost gone.

So that's why we're demonstrating in Albion, and that's why we're going to keep demonstrating. We are committing minor crimes of trespass to prevent Harry Merlo's much greater crimes. Crimes against our community, which is being stripped of its resource base. Crimes against the timber workers whose livelihood is being sacrificed to Harry's global schemes. Crimes against the forest, which can never recover from the loss of the last of the redwood trees. And crimes against the Earth, whose life support system is collapsing under the weight of Harry Merlo-style corporate greed.